Last week the Mexican government announced it had spent $800 million dollars buying crude puts in the $63 to $65 range. When triple digit crude prices appear to be on the doorstep, why did they place this hedge? The simple answer is that they are protecting their fiscal budget.
This is the proper and good use of hedging. Not to make additional profit, but to ensure an already budgeted profit.
Energy traders with a conservative risk tolerance should take heed of this action and look for opportunities to be sellers of put options, as there will be plenty of market participants similar to the Mexican government looking to buy options.
Although we may continue to see more pull back in energy futures as December winds down, especially with refiners looking to sell inventories to avoid ad valor em taxes and traders locking in year end profits. The outlook for 2011 is for energy to be well supported on any pullbacks allowing put option sellers to enjoy a profitable premium income stream.
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